FirstSun Capital Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. FirstSun is a bank holding company operating Sunflower Bank and mortgage and wealth-management businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net interest income | $41.3 million | $38.4 million; up 7.5% |
| Provision for loan losses | $3.7 million expense | $0.35 million benefit |
| Noninterest income | $23.7 million | $33.9 million; down $10.2 million |
| Noninterest expense | $52.5 million | $55.2 million; down $2.7 million |
| Net income / diluted EPS | $7.7 million / $0.41 | $14.3 million / $0.76 |
| Net interest margin | 3.08% | 3.21% |
| Return on average assets / equity | 0.54% / 5.85% | 1.13% / 11.46% |
| Efficiency ratio | 80.75% | 76.32% |
Net interest income benefited from loan growth and lower deposit costs, but the margin narrowed as earning-asset yields fell. Mortgage banking income declined to $14.6 million from $25.1 million; mortgage originations were $0.5 billion versus $0.7 billion, and mortgage operations pretax income fell to $0.7 million from $8.4 million. MSR capitalization and fair-value changes, net of hedging, partly offset lower sale gains and origination fees.
Balance sheet, cash flow and capital
- Assets: $5.734 billion at March 31, versus $5.667 billion at year-end 2021. Loans held for investment, net of deferred fees and costs, were $4.315 billion, up $277.9 million from year-end. Deposits were $4.946 billion, up $91.5 million.
- Liquidity: Cash and cash equivalents were $487.7 million, down from $668.5 million at year-end. Management reported bank liquid assets of $405.5 million, or 7.1% of assets, and $736.1 million of additional FHLB borrowing availability. The filing states management believes liquidity is adequate.
- Cash flows: Operating activities provided $15.2 million; investing activities used $282.7 million, principally reflecting net loan originations; financing activities provided $86.8 million. Cash decreased by $180.8 million during the quarter.
- Credit: Allowance for loan losses was $50.5 million, or 1.17% of loans, versus $47.5 million, or 1.18%, at year-end. Net charge-offs were $0.7 million. Nonperforming loans were $31.4 million, or 0.73% of loans, down from $34.8 million, or 0.86%, at year-end.
- Debt: Borrowed funds totaled $127.8 million, including $40.0 million of FHLB advances, $13.2 million of convertible notes (net), and $74.6 million of subordinated debt (net). FirstSun issued $25 million of subordinated notes in January. It repaid $6.0 million of convertible notes on April 11, after quarter-end.
- Equity and regulatory capital: Stockholders’ equity was $515.5 million, down $8.5 million from year-end, mainly due to unrealized losses on available-for-sale securities. The Bank remained well-capitalized; its CET1 ratio was 10.47% and total risk-based capital ratio was 11.48% at March 31.
Material changes and notable events
- Net income fell 46.5% year over year. Lower mortgage activity was the main pressure on noninterest income; higher loan-loss provisioning also weighed on earnings. Salary and benefits expense declined with lower mortgage commissions.
- Available-for-sale securities had $20.5 million of gross unrealized losses at March 31, compared with $4.7 million at year-end. The quarter’s after-tax unrealized securities loss was $16.3 million in other comprehensive income, reducing reported equity. Management attributed the decline in fair value primarily to rising rates and said it did not consider the securities other-than-temporarily impaired.
- Loan growth excluding PPP balances was 7.7% from year-end (30.9% annualized, as stated in the highlights); growth was concentrated in commercial and residential real estate lending. PPP loans outstanding were approximately $38.9 million, down from $68.4 million.
- FirstSun completed its merger with Pioneer Bancshares on April 1, 2022, after the reporting date. It issued approximately 6.5 million FirstSun shares and expected to pay about $2.6 million in cash for fractional shares. The acquisition added 19 Texas branches; Pioneer’s results and balances are not included in this quarter. Purchase accounting and integration costs and benefits remain to be assessed.
Outlook, risks and contingencies
- No quantified earnings or financial guidance is provided. Management said it did not expect mortgage banking revenue to continue at prior-year levels, citing rising rates, lower refinance volumes, low housing inventory and margin compression.
- Interest-rate exposure is significant: the company’s simulation estimated a 22.1% increase in 12-month net interest income under an instantaneous +300-basis-point shock, but a 3.7% decline under a −100-basis-point shock. These are modeled scenarios, not forecasts.
- Risks include merger integration and purchase accounting, interest-rate and market changes, credit quality and economic conditions, deposit and customer behavior, mortgage production, regulatory changes, and continuing COVID-19 and geopolitical impacts. The company also noted potential future allowance changes with its planned CECL adoption in 2023.
- Off-balance-sheet commitments included $1.372 billion of fixed- and variable-rate loan commitments and $11.4 million of standby letters of credit. The company cautions that commitments may expire undrawn.
- Disclosed litigation includes a trust-administration claim seeking recovery tied to approximately $19.7 million of distributions; a putative overdraft/NSF-fee class action; and a wire-transfer suit alleging approximately $5.1 million in unauthorized transfers. The Bank disputes the claims. One overdraft case was dismissed April 15, 2022; management said it could not reasonably estimate the wire litigation outcome, while stating the proceedings were not expected to have a material adverse effect based on information then available.
Important facts for investors to verify
- Post-merger results, integration costs, purchase-price allocation, synergies and realized performance of the 19 acquired Texas branches.
- Whether mortgage banking revenue and margins continue to decline, and how MSR valuations and hedges respond to interest-rate and prepayment changes.
- Loan growth, portfolio mix, classified and nonperforming loans, charge-offs, and adequacy of the allowance as credit conditions evolve.
- Deposit stability, uninsured deposit levels, liquidity after the cash decrease, and use of borrowing capacity.
- Effects of securities unrealized losses on equity and the company’s ability and intention to hold affected securities.
- Developments in the disclosed litigation and any resulting financial exposure.